Agricultural Business Structures
It is important to set out how your family business is run and record the agreements between yourselves to avoid future disputes or difficulties particularly if one of you were to retire or pass away.
Our highly regarded and friendly agriculture and estates solicitors are specialists in farm partnerships and other business structures and can help you choose and implement an efficient structure for your business.
There are several different business structure options. It is important to consider the tax implications of these and how your farmland is to be owned and used.
Commonly, an agricultural business will be run as a partnership between individuals, who are often family members. They are usually involved in the day to day running of the farm. However, there are alternatives, and each business should look at which is the most appropriate for their situation.
Agriculture Business Structure Types
A partnership is where two or more parties carry on business together to make a profit. A partnership can exist as a matter of law even if people in business did not intend to create a partnership. Many farmers may find that a partnership has naturally been created with their family members without consideration as to whether it is the most appropriate structure for their circumstances.
There are rules set out in the Partnership Act 1890 about how partnerships are run. Many of these rules can be changed by agreement between the partners. A written partnership agreement can give greater control to partners and provide clarity over the buildings and land that are held as partnership assets. This is essential for future inheritance tax relief claims.
All partners in a partnership have unlimited personal liability in respect of debts of the partnership. This means their personal assets are at risk. There are no requirements to file records of the business on public registers which can be advantageous in terms of confidentiality.
A limited partnership combines the flexibility of a partnership with some limited liability. A Limited Partnership requires registration at Companies House. Some information about a Limited Partnership is publicly available, but not as much as for companies or Limited Liability Partnerships.
There are two categories of partner in a limited partnership. General partners have unlimited personal liability for the debts of the partnership and are responsible for managing the business. Limited partners invest capital but do not take an active role in the farm’s operation. Limited partners have limited liability to the capital they have contributed. There must be at least one general partner in a Limited Partnership meaning that at least one partner will always have their personal assets at risk.
Limited Liability Partnership
A limited liability partnership combines elements of partnerships and companies. The main advantage of a limited liability partnership is that the liability of the members is limited to their capital and undrawn profits.
A limited liability partnership is governed by a partnership agreement which is confidential to its partners; this allows for considerable flexibility… However, this structure is required to file annual accounts and some other information at Companies House which will be publicly visible. Members of a limited liability partnership are also taxed individually and, unlike a company, a limited liability partnership is not subject to corporation tax.
A limited company is a separate legal entity and is owned by its shareholders. The main advantage of a limited company is that the liability of shareholders is generally limited to amount paid, or required to be paid, to the company for the issue of the shares. Limited companies are, however, required to file annual accounts and other information at Companies House which is publicly visible.
Unlike the previous structures, an limited company is taxed separately to its shareholders and its capital and income are subject to corporation tax. Limited companies usually return their profits to their shareholders by a dividend. The shareholders may have to pay tax on dividends and capital gains tax if they sell their shares, but some allowances, reliefs are available.
A limited company is required to file annual accounts at Companies House.
Ownership and Use of Land
Irrespective of the structure chosen, it is important to consider how any land will be owned and used. In the case of companies and limited liability partnerships, these structures are separate legal entities and can own land and other assets themselves. If a company or limited liability partnership becomes insolvent, the assets they own are at risk. Land and other assets are sometimes held outside a company or limited liability partnership to help manage this risk.
In the case of partnerships, it is important that the arrangements for land and other assets should be clearly documented. These can be partnership property, in which some or all of the partners can have a beneficial interest (even if they are not legal owners), or personal property used by the partnership under a lease or other arrangement.
The ownership of land and other assets can have important consequences for tax, including Inheritance Tax, Capital Gains Tax and Stamp Duty Land Tax.
When deciding on which business structure is best for you, it is important to consider the potential tax treatment of the business and its partners or shareholders. There are benefits and drawbacks of each structure and these should also be considered when choosing which structure is most appropriate for your concerns and requirements.
The Spire Solicitors Agriculture and Estates team’s breadth of knowledge and experience allows us to understand your business and the challenges and opportunities you may face. This will allow us to advise on all aspects of structures and ensure you benefit from any tax relief and allowances available.
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